Two of the most common Indian savings instruments are computed in completely different ways, and conflating them produces expectations that the arithmetic cannot deliver. A fixed deposit is one lump sum compounding for a known term. A systematic investment plan is dozens of small sums, each compounding for a different length of time.
That difference is why a SIP quoted at 12% does not turn ₹1,20,000 of annual contributions into ₹1,34,400. Here is what the formulas actually say.
The FD formula, and why frequency matters
A fixed deposit compounds a single principal:
Maturity = P × (1 + r/n)n×t
where P is the principal, r the annual rate as a decimal, n the number of compounding periods per year, and t the years.
Indian banks typically compound quarterly, so n = 4. On ₹1,00,000 at 7% for 5 years:
- Quarterly (n=4): 100000 × (1 + 0.0175)20 = ₹1,41,478
- Annually (n=1): 100000 × 1.075 = ₹1,40,255
- Monthly (n=12): ₹1,41,763
The gap between annual and quarterly is ₹1,223 on a ₹1 lakh deposit — small, but it is free money that depends entirely on a term in the fine print. Two FDs advertised at the same 7% are not the same product if one compounds annually.
The quantity that makes them comparable is the effective annual rate: (1 + r/n)n − 1. At a nominal 7%, quarterly compounding gives an effective 7.186%, monthly gives 7.229%, annual gives exactly 7%. When a bank advertises a nominal rate and an effective yield side by side, this is the relationship between them.
Why a SIP is not an FD with instalments
A SIP invests a fixed amount at a fixed interval. Each instalment starts compounding the day it lands, so the first one has the whole term to grow and the last one has almost none.
The standard formula treats it as an annuity-due — contributions at the start of each period:
Maturity = M × [((1 + i)n − 1) ÷ i] × (1 + i)
where M is the monthly amount, i the monthly rate (annual ÷ 12), and n the number of instalments.
₹10,000 a month for 10 years at an assumed 12% annual: i = 0.01, n = 120.
- Invested: ₹12,00,000
- Maturity: ₹23,23,391
- Gain: ₹11,23,391
That is a 93% total gain over ten years on money that was, on average, invested for only about five of them. Which is the whole point — but it is also why the headline rate and the headline gain never look like they match.
The 12% that is not 12%
Here is the specific confusion worth clearing up. Take one year of that SIP: twelve instalments of ₹10,000 at 12% annual.
The total invested is ₹1,20,000. The maturity value is ₹1,28,093. The gain is ₹8,093, which is 6.7% of what you put in — not 12%.
Nothing is wrong. The 12% is an annualised rate applied to each rupee for however long that rupee was invested. The January instalment compounds for twelve months; the December instalment for one. The average holding period is around six and a half months, so the average rupee earns a bit over half a year's growth.
This is why comparing a SIP's "return" to an FD's rate by looking at total gain over total invested is meaningless. The two numbers are measuring different things, and the SIP will always look worse on that comparison even when it has performed better.
XIRR: the number that is comparable
The honest way to compare an instrument with staggered cash flows against one with a single flow is XIRR — the annualised rate that makes the present value of every cash flow sum to zero, accounting for the exact date of each.
For the one-year SIP above, the XIRR is approximately 12%, matching the assumption we started with. The 6.7% figure is the absolute return; the 12% is the annualised one. Both are true, and only the second can be put next to an FD rate.
The practical rule: if you are comparing two investments with different contribution patterns, compare annualised figures. If you are asking "how much money will I have", use absolute. Mixing them is how people conclude that an FD beat an equity SIP over a period when it did not.
What the calculators cannot tell you
Both formulas need an assumed rate, and that is where the honesty ends for a SIP. An FD rate is contractual — the bank has committed to it and the only real risk is the bank. A SIP's 12% is a guess about a market.
So treat the SIP number as a projection with a wide band, not a forecast. Run it at 8%, 12% and 15% and look at the spread. On that ten-year ₹10,000 monthly SIP:
- At 8%: ₹18,41,500
- At 12%: ₹23,23,391
- At 15%: ₹27,86,573
A seven-point swing in the assumption moves the outcome by over ₹9 lakh. Any single number presented without that range is false precision, and the compounding makes the spread widen with time rather than narrow.
The other thing neither formula includes: tax. FD interest is taxed as income at your slab rate every year, whether or not you withdraw it. Equity gains are taxed on realisation, and at different rates for short and long holding periods. A 7% FD and a 7% equity return are not the same post-tax outcome, and the gap depends on your bracket.
Working through your own numbers
The SIP calculator and the FD calculator implement the formulas above, including the quarterly compounding default that Indian banks use. Both run in the browser, so the amounts stay on your machine.
If you are weighing an investment against paying down a loan, the EMI calculator gives you the other side: a loan at 9% is a guaranteed 9% return on prepayment, which is a higher certainty-adjusted number than an uncertain 12%.
Two habits worth keeping. Always run a projection at more than one rate. And when a return looks surprisingly low on a SIP, check whether you are comparing an absolute figure to an annualised one before concluding anything.
Frequently asked questions
Why is my SIP gain much less than the rate I assumed?
Because each instalment compounds only from the date it was invested. Over one year the average rupee is invested for about six and a half months, so a 12% annualised rate produces roughly a 6.7% absolute gain on the total contributed. Both numbers are correct; they measure different things.
Does FD compounding frequency really matter?
Yes, though modestly. ₹1 lakh at 7% for 5 years matures at ₹1,40,255 compounded annually and ₹1,41,478 compounded quarterly. Compare the effective annual rate — (1 + r/n)^n − 1 — rather than the nominal rate.
What is the SIP maturity formula?
M × [((1 + i)^n − 1) ÷ i] × (1 + i), where M is the monthly amount, i the monthly rate (annual ÷ 12) and n the number of instalments. The trailing (1 + i) is because contributions are made at the start of each period.
Should I compare SIP returns to an FD rate directly?
Only if both are annualised. Use XIRR for the SIP, which accounts for the date of every cash flow. Comparing a SIP's absolute return to an FD's annual rate understates the SIP every time.
Why does the projected amount change so much with the assumed rate?
Compounding amplifies the assumption over time. On a ten-year ₹10,000 monthly SIP, 8% gives ₹18.4 lakh and 15% gives ₹27.9 lakh. Always run more than one rate — a single projected figure is false precision.
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